How My First Commercial Real Estate Investment Set Me on the Path to Freedom
The following is adapted from Commercial Real Estate Investing by Mike Sowers.
The Center Drive property was the very first deal I ever did in commercial real estate. It was a twenty thousand-square-foot industrial flex building that had showrooms and offices in the front and drive-in doors in the back.
My partner found this property listed on the MLS, of all places. It had ten units that ranged in size from 1,000 to 3,000 square feet (SF) each, and they were all occupied. The owner was an elderly gentleman who only had a few months left to live (God rest his soul).
The leases were all short-term leases: either month-to-month or less than a year left on them. The lease documents stated that the landlord was supposed to pay all of the expenses except the utilities, but the owner wasn’t enforcing this clause well and was paying the water bills for the tenants.
At first glance, you could see that the property needed a roof and looked very tired on the outside. The electrical was all messed up. Wiring and plumbing ran between units so tenants were fighting over who should be paying for what meters. After interviewing the tenants, we found out that some tenants wanted more space, and some wanted out of their leases.
The average gross rent rate on the leases was $5.50 per square foot per year, which generated $110,000 each year in income. The expenses were $70,000 so the current NOI was around $40,000. It was being offered at $800,000, which was a 5% cap rate.
Set the numbers aside for a minute. Can you see the problems here that can be solved to create value in the property?
What I saw (with my partner’s help) that the other investors didn’t was that the lease rent rates were at an average gross rate of $5.50 and the market was $8.00. The goal is to buy properties that are not stabilized. Stabilized means market-rate occupancy at market-rate rents. Even though this property was fully occupied, it was not yet stabilized because the rents were very depressed. I also realized the tenants were supposed to be paying the utilities, but the landlord was not collecting.
I paid $700,000 for the property and spent $75,000 cleaning it up, so I was all in at $775,000. I increased the NOI from $40,000 to $100,000 in two years. The increase in the NOI that we achieved came from driving the rent rates up as leases renewed, billing the utilities back to the tenants, and fixing major problems so the annual repairs and maintenance budget decreased significantly.
I refinanced with an appraisal value of $1,250,000 and got all of my money back out of it and now enjoy a residual income of around $50,000 per year on that property, with no capital into it. Plus, if I ever sell it, I will walk away with a half-million-dollar paycheck.
Everyone else kept telling me I overpaid and got screwed on the deal because I bought it at a 5.7% cap rate when the market cap rates were 7–9%. If that’s what getting screwed means, I hope it happens again soon!
Most investors in our market politely took a pass on Center Drive, but it’s the property that set me on the path to freedom. After a decade in residential real estate, Center Drive showed me that commercial real estate was the way to go.
Because of my experience with that property — and the help of my partner at the time — I was able to learn a lot, make a lot of money, and find a career that I love. Most importantly, though, I was able to start developing a system that has allowed me to create equity and cash flow from commercial real estate…and I’ve never looked back.
For more advice on how you can successfully invest in commercial real estate too, you can find Commercial Real Estate Investing on Amazon.
Mike Sowers rehabbed, wholesaled, flipped, or rented over 1,000 properties in the residential sector before he sold his remodeling business and transitioned full time into commercial real estate investing. Today he operates Commercial Investors Group which is a commercial real estate investing franchise system that is expanding into most major markets in the US. He is also the host of the CREative Commercial Real Estate Podcast and has an online course and Mastermind Group that helps aspiring investors scale up from residential to commercial investing.
